So, you found your dream home, got your accepted offer, and everything is flowing along smoothly with you lender (hopefully it’s us).  You’ve already picked out the new colors for the bathroom & kitchen, found all you need to know about schools in the area, and have already decorated the entire home in your mind.  It’s a wonderful and exciting process purchasing a new home.  You get a phone call from your lender, and they have some not-so-great news.  The 3^rd party appraisal came in with a value less than your accepted offer.  No lending institution (that I know of) will lend more than the appraised value of the home, and clearly this can be an issue if the appraisal comes in low.  Yikes!

So, what exactly does this mean?  Do you lose the home?  Can you still continue?  Luckily, there are a few options available to a VA borrower:

• Buyer comes in with the difference
  • Buyer pays the difference in value between the accepted offer and appraised value of the home (ie appraised value = $350,000 … accepted offer = $355,000 … borrower pays additional $5,000 to cover the difference)
• Renegotiate purchase price
  • The purchase price can be renegotiated between seller and buyer to the appraised value of the home.
• Meet in the middle
  • The seller can reduce the price a portion, and the buyer can come in with additional cash to meet in the middle.
  • Both agents and lending partner could also contribute towards the difference in value (i.e. lowering commission or providing additional credits)
• The borrower can walk away
  • The VA borrower is protected by a ‘walk away’ clause in the VA Addendum to Contract.
  • If the appraised value comes in low, and an acceptable compromise cannot be negotiated, the borrower can walk away without losing their escrow deposit.

While it’s not the greatest scenario, all is not lost if the appraised value comes in below your accepted offer.  Everyone involved in the sale process wants the deal to close, and that’s why it’s important to work with real estate professionals that you can trust, knowing that they will be willing to work and negotiate in your best interests.  We know how much you love that new paint color!

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Okay, so you’re a Realtor and you run into an interested buyer who happens to be VA eligible.  She’s heard of all the great benefits tied to the VA Loan program and she’s ready to go.  Before you run out the door to show property, here are the 5 most common mistakes you should avoid when representing a buyer (or seller) in a VA transaction.

1. Putting an offer on a condo that is not eligible for VA financing

Though most condos are eligible for VA financing, there is still a significant amount of condos that have either been denied VA approval, or have yet to go through the approval process.  Whatever the case, the last thing you would want to do is waste your time (as well as your buyer’s time) showing property that your buyer can’t finance.

Solution

If you know your buyer is going to do VA financing and they are looking for a condo, go ahead and verify the condo is approved by using our VA Condo Eligibility Check Tool.

In addition, just because a property looks like a Single-Family Dwelling (SFD), it doesn’t mean it is a SFD.  In Hawaii, it’s quite common that home is built on a CPR lot.  In this case, the dwelling would be considered a “Site Condo” in which the same condo rules apply; it must be approved for VA financing.

If the Site Condo has not been through the approval process as of yet, we can help.  Contact us and we can let you know exactly which documents to collect from the seller in order to try and get that particular Site Condo approved with the VA office.  Just be prepared, the approval process can take anywhere from 2-4 weeks after getting the necessary documents.  There is often more documentation to gather for established buildings, but those can also be submitted for VA approval.

2. Putting an offer on a property that has un-permitted additions

One rule that the VA is very strict on is that they don’t allow financing on properties without the necessary permits.  This is more common on SFD than with condos in which the owner decides to make an extension or put in an additional bathroom without getting the proper permits from the permit department.   On a VA loan, if the appraiser points out that any additions or improvements were done without the necessary permits, the VA will not guaranty the loan.  Without the VA’s guaranty, you won’t find a lender who will finance the loan.

Solution

Before putting an offer on a property (especially on a SFD) request the permit package from the seller’s agent.  Also, double check the tax records.  If the sketch and dimensions don’t match up with the physical dimensions of the property, it’s more than likely the property is missing the necessary permits.

If your buyer is still adamant about wanting to buy this property, and the buyer has enough for a significant down-payment, consider having them do a conventional loan vs. a VA or FHA loan.  Most conventional mortgages (depending on the lender) will allow non-permitted additions, as long as the appraiser doesn’t count the value of these additions in the appraised value.

3. Not being proactive with getting condo docs

On VA Loan for a condo purchase, the lender is unable to order the appraisal until they have the necessary condo docs.  The necessary condo docs are:

• RR105C (Condo Questionnaire)
• Budget & Financials
• Last two Meeting Minutes

Solution

If you are representing a VA buyer, make sure you are adamant with the seller’s agent that you’ll need the condo docs ASAP to avoid a delay in ordering the appraisal.  If you are representing the seller, after getting an accepted offer, request the condo docs from the condo management company right away.

We’ve had circumstances in which it took a full 2 weeks to get the condo docs.  Tack on an additional 2 weeks or so it takes to get the appraisal back, you are looking at a full month from the open of escrow to getting an appraisal.  You can see how this can seriously delay the closing of a transaction if condo docs are not received right away.

4. Having a contract signed without a VA addendum (or using an inadequate VA addendum)

Having a VA Addendum signed at the time of the purchase contract does three things:

1. Discloses that the Veteran can back out of the transaction (get a refund of their escrow deposit) if the appraised value comes in below the agreed sales price.
2. States that the seller(s) must provide a termite inspection report at no cost to the Veteran.  If the report shoes there are termites or termite damage, the seller will have to pay for a tenting or repair any damages prior to close of the transaction.
3. Identifies who’s paying for the VA Non-Allowable closing costs that the Veteran cannot pay for.

If this VA Addendum is not presented to the seller(s) alongside the purchase contract when making an offer, the seller may not know the full implications with agreeing to accept an offer by a VA buyer.  Without seeing the VA Addendum, the seller may have a skewed view of the total costs involved with selling their property. Obtaining the seller’s signature on the addendum after already agreeing to the purchase contract is always a little harder task to accomplish.

Solution

When requesting the Pre-Approval letter form your VA Loan Specialist, make sure you also request the VA Addendum to the Purchase Contract.  This way you can submit the Offer, the Pre-Approval letter and the VA Addendum all at the same time.

We’ve also seen some real estate firms furnish their own VA Addendum  We’ve noticed that some of these VA Addendums don’t cover the three necessary items as described above.  It’s always best to get the VA Addendum from the lender since the lenders’ underwriter will be the one to determine if the VA Addendum is sufficient for the transaction or not.

5. When representing the seller, denying a VA buyer’s offer due to concerns of additional costs.

One of the biggest myths we’ve encountered concerning VA Loans is the misunderstanding of the seller’s costs on a VA transaction.  We still hear from agents saying that their seller’s won’t accept a VA transaction because they think that they will have to incur several thousands of dollars in additional closing costs.

Reality is that on average, the VA Non-Allowable costs that Veterans cannot pay for is roughly in the $1500 - $2000 range.  In addition, there are many lenders, Hawaii VA Loans included, who are proactive in paying for at least half of the VA Non-Allowables.

With the lender’s help, it’s quite common that the additional expenses incurred by the seller will be roughly $750-$1000.

Solution

Before denying a VA Loan offer, find out if the lender will be covering any of the VA Non-Allowables (should be disclosed in the contract or on the VA Addendum).  In this market, VA Loans are probably the closest thing to a sure bet when it comes to mortgage financing.  In an industry that has seen drastic changes with tightening guidelines, the VA Loan program has been the most stable and least restrictive when it comes to their lending standards.  With the many benefits tied to the VA Loan program (no down payment, no mortgage insurance, reduced closings costs, flexible qualifying guidelines, etc.), there are fewer obstacles that can prevent a VA approved borrower from falling out of escrow.

In other words, it may be foolish for a seller to deny an offer from a VA buyer for simply $750-$1000 in additional expenses.

Recap

The VA Loan program is a great loan product that many Veterans are taking advantage of in today’s market. Hopefully this review of the common mistakes we’ve seen Realtors make, will be helpful the next time you have a VA transaction!

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There is often confusion about the difference between getting “prequalified” and “preapproved” for a loan. Don’t they mean the same thing?  It’s common to think so, but they’re actually different.

Prequalification

Getting prequalified means that you’ve contacted a loan officer, allowed them to review your credit, and provided them verbal information regarding your assets & monthly income.  The loan officer determines an approximate monthly payment for the proposed loan and makes sure that the Debt-to-Income ratio (how much you make vs. how much you pay out in monthly expenses each month) is within tolerance.  The process can take as little as 15 minutes over the phone.

Being such an informal process makes it quite simple, but adds a level of risk that the information may be misinterpreted.  Once the loan officer has reviewed the actual income and asset documentation (lender’s calculations are often different than how a borrower may calculate them) some folks find that they no longer qualify for the loan and their purchase might be in jeopardy.

Preapproval

Getting preapproved takes it a step further.  Once you are prequalified, the loan officer provides you with a list of documentation needed for review in order to verify the figures provided.   You’ll likely sit down together, he’ll make any adjustments to income & assets per the verification documents and submit the loan through an Automated Underwriting System to determine the approval & eligibility.  This process is much more thorough and gives both the borrower (you) and Realtor the added assurance that financing should move smoothly.

Here’s a list of the documents your loan officer may ask for in order to complete a preapproval:

• Most recent LES or pay stub (total of one month).
• Most recent 2 years of Federal Tax Returns (including all schedules & W2s).
• Most recent 2 months of bank statements showing assets that will be used for closing.

Keep these differences in mind when you’re interviewing your loan officer, and if you are not asked to provide any of these papers to them, then be sure to ask when they will review them because you don’t want it to be after your offer has been accepted.

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I learned an expensive lesson this week.  In general, for Hawaii purchase transactions, escrow fees are split 50/50, owner’s title insurance is split 60/40 and the conveyance tax is paid by the seller.  I learned that this is not law, actually just the traditional agreement as outlined in the HAR (Hawaii Association of Realtors) standard purchase contract, Section C-11.

The transaction I was about to close was an REO (bank or lender owned property) owned by Fannie Mae.  Fannie supplies their own purchase contract and within it is a section that states that, regardless of local tradition or customary practice, Fannie Mae will not pay any transaction costs nor any transfer (conveyance) taxes.  This means that the buyer is responsible for 100% of the escrow/settlement fees and 100% of the owner’s title insurance premium.

…and Even More to Learn

Fannie Mae’s contract also contains a section that states, per federal statute, Fannie Mae is exempt from paying taxes.  Astonished and after several readings, this makes it seem as if the transaction would be subject to no conveyance tax.  Hooray!!!! However, if you read the actual federal statute referenced in the contract, Fannie Mae is NOT exempt from real property taxes, so the buyer IS responsible for the conveyance tax in this transaction.

The seller in this transaction (Fannie Mae) did provide a credit of $1550, but that didn’t go very far, considering that total escrow/settlement fee for an REO transaction is actually higher than normal and ran almost $2000.  The additional portion of the owner’s title insurance was almost $700 and the conveyance tax was $440.

All told, the additional costs equated to a little over $2000.  As the lender and one who made the mistake, I absorbed the costs, creating an expensive lesson.  Hopefully you can learn from me.

If you are a VA borrower, you aren’t responsible for any part of the escrow fee, but you will still be faced with paying the full owner’s title insurance and conveyance tax.  The amount of these depends upon the size of the transaction, but will likely run anywhere from $600 to $1400 extra.

Here’s what you can do to make sure you’re accounting for the total cost of the transaction:

Solution:

• Review C-11 of any standard HAR (Hawaii Association of Realtors) Purchase Contract to be sure it is intact.
• Review any non-standard contract in its entirety to see if it makes any reference to transaction fees.  If it doesn’t and if the seller is a corporation large enough to be recognized, check with escrow to see how the company typically addresses the issue.
• Your lender should disclose the conveyance tax, escrow and title fees on the GFE, if they are not disclosed, check with the escrow company to find out how much they will be.

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The $8,000 first-time homebuyer credit just won’t quite go away.  As much as we’d love to say this was for everyone, it’s a bit limited in scope, but if you qualify, what fine, fine news!  Eligible taxpayers who contracted to buy a home qualifying for the first-time homebuyer credit before the end of April now have until Sept. 30, 2010 to close the deal, according to the Internal Revenue Service.

The Homebuyer Assistance and Improvement Act of 2010, signed by the President earlier this month, extended the closing deadline from June 30 to Sept. 30 for any eligible homebuyer who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010. The new law addresses concerns that many homebuyers might be unable to meet the original June 30 closing deadline.

The IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties’ names and signatures if required by local law, the property address, the purchase price, and the date of the contract.

More details on claiming the credit can be found in the instructions to Form 5405, as well as on the First-Time Homebuyer Credit page on IRS.gov.

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If two Veterans who are eligible for a VA Loan want to purchase a property together, they can by doing a “Split Entitlement” VA Loan.  What “Split Entitlement” means is that instead of a Veteran using 100% of his or her entitlement to purchase a home, the entitlement is split 50/50 with another Veteran - which they in-turn share responsibility in making sure the loan is eventually paid in full.

What are the steps for “Split Entitlement”?

The process is quite similar to doing a regular VA Loan.  The only difference is that when all Prior-to-Doc conditions are met (right before signing final loan documents), the file must be sent to the local VA office for prior approval.  This process may take up to 10 days, but once the final approval is issued by the VA office, the VA Loan Specialist may proceed with ordering the loan documents and closing the loan.

Doing a “Split Entitlement” VA Loan is best for unmarried Veterans looking to share the cost of homeownership.

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Greece is in financial trouble and that is affecting economies the world over.  The problem is that Greece’s National Debt simply grew too large.  Due to government’s spending, the debt expanded 15% annually, but the economy itself was shrinking about 5% each year.  As a result, the total government debt grew to 115% of the GDP and it is expected to grow to 150% by 2013.  What that means is that the government owes more money than the whole country produces in a year.  Believe it or not, the 115% number isn’t that much higher than many other industrialized countries.  However, Greece has deep systemic problems. It was forced to cut back it’s spending and because it is a consumer based economy that produces almost no exports, there is little for the economy to do but shrink and make it’s debt burden greater.

Why Now?

In October, a new government shocked markets by announcing the current year’s deficit was more than four times the previous government’s estimate. There were also revelations that past governments had fudged statistics and that further eroded investors’ confidence.  As a result, bond markets hammered Greek debt and refused to lend to Greece at an affordable rate.  Greece was in danger of not being able to make it’s May debt payments.  Because Greece is part of the European Union, if Greece couldn’t make the payments, the EU was forced to jump in and help.  Unfortunately, the EU was also struggling, and they could barely afford an expensive bailout.  If the EU were to go into default, the repucussions would be felt worldwide.

How it affects the U.S.

Fear helps the U.S. Bond Market - The US Economy, as shakey as we may view it, is considered the most stable economy in the world.  In addition, US Treasury Bills, Bonds and Notes are considered the safest investment in the world.  As a result, any time an event occurs that causes investors to worry about getting their money back, they will put their money in the safest investment possible, US Treasuries.  The event could be a new worry about US Stocks, Asian Bonds, Europe’s economy, or anything else.  This is called a, “flight to safety.”  When this happens, US Treasury prices go up which moves the rates down.  Those rates often go down so much, that investors want to make a little more money for their investment, so they buy US Mortgage Backed Securities, which aren’t 100% guaranteed by the US government, but pretty close.  That investment lowers the mortgage rates that US lenders can offer.

How it Affects You

If you are in the market for a new home, then all this economic bad news may actually good news for you.  All this fear is bringing mortgage rates down to record lows once again.  Every bit of bad news is crumbling investors’ confidence and dropping rates.  Just Friday, US employment numbers came out weaker than normal and the rates for mortgages fell once again.  What direction rates will take in the future is anybody’s guess.  Just remember the mortgage shopper’s golden rule, bad news for the economy is good news for you, and vice versa.

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So, what does this mean for a good majority of us?  Well, it’s just back to business-as-usual.  Rates are low, housing prices have settled, and the economy is starting to turn around - even without the credit, it’s still a great time to buy.

Now, here is the exciting news!  There is a little known blurb towards the end of HR 3548 - Worker, Homeownership, and Business Assistance Act of 2009 (the bill that extended the $8000 tax credit to April 30^th, 2010), that allows for an extension of the credit until April 30^th, 2011.  Sweet!  So, who’s still in?  Who get’s the VIP extension of this lovely chunk-o-change?  Let’s take a look, shall we?

Who qualifies?

• Members of the uniformed services (military)
• Members of the Foreign Service
• Employees of the intelligence community

How do I qualify?

• Must be on official extended duty outside the United States for at least 90 days between January 1, 2009, and April 30, 2010

What do I qualify for?

• $8000 first time homebuyer credit
  • Signed contract must be submitted by April 30, 2011

This is pretty exciting news for those that qualify!  So, if you found yourself deployed last year, you can rejoice in knowing that you can take full advantage of this tax credit, while the rest of us poor souls can only watch from the sidelines.  It’s a nice ‘Thank You!’ for your dedicated service to our country.

If the dream of homeownership lingers in your mind, this sure is a great incentive to pursue those further, and we’d love to help you along the way.

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Of course, nothing is too good to be true, so let’s take a quick look at the potential challenges one could face when attempting to purchase a short sale property.

Potential Challenges

Short sales can be challenging for a number of reasons:

• They tend to take a long time -  Short sales typically take timeframes that are counted in months, not days.  While a normal purchase can be completed in 30-45 days, a short sale may take anywhere from 3 to 9 months or more to complete from the time an offer is presented.  The timeframe really depends upon the existing lender on the home and how busy they are.
• The bank has to consent to the loss - The existing lender is going to take a loss on the sale of the property, so they need a quick evaluation of the sales price to make sure that it is close enough to the actual market value to make it worth proceeding.  The size of the loss is depends upon the size of the outstanding lien, but in reality, it is the proximity of the offer to the market price that drives the decision.
• The seller has to qualify - Not only does the existing lender review the offer in relation to the market value of the home, they must also determine that the seller is in a position of financial hardship and qualifies to do a short sale.
• The communication process is tough - Attilio Leonardi just returned from a meeting in Florida where the head of Bank of America’s loss mitigation department informed the group that his department receives 88,000 incoming calls a day.  The plea from B of A was, “please stop calling”.  These departments are extremely backed up and the extra communication isn’t going to speed things along, it actually does the opposite.  Unfortunately, for a prospective buyer, waiting for an answer is the norm and there will not be day to day updates, or even week to week.  One update a month is about the best to hope for.
• The market may move while you wait - For a transaction that may take months, there is a big chance that the market may move.  Especially if you are making an offer in an area with a slough of short sales, values may be declining.  A property worth $450K at the time of initial offer, may decline in value to $425K by the time the deal closes.  However, it appears that lenders have been pretty good about reducing the sales price if the appraised value comes in below the offer price.  After all, the lender is motivated to sell and would be remiss to start the process over again.

Potential Benefits

• There is really only one benefit to buying a short sale property, but it is a big one…money!  While lenders are motivated to sell these properties to recover their losses and have the money available to lend again, they do want something close to market value.  If you submit an offer at 50% of the market value, you most likely won’t get a response.  However, if you are within 10-20% of market, you may have a chance.  So, submit a reasonable offer, or multiple reasonable offers and you may end up with a dream home, for a nice discount.

Keys to Success

• Extreme Patience - First and foremost, patience is the key.  A short sale offer may take months to be approved and, as a buyer, there isn’t much you can do to move things along.  Here are things to keep in mind when your patience starts running thin:

1) B of A gets 88,000 incoming calls to their loss mitigation department each day, and the same is true for most of the national lenders that service most of these loans.  One more call about your file won’t have much effect speeding things along.  If ever short sale buyer exhibited patience, there would be fewer inquiries about the same thing and the whole process could speed up.

2) In order for your short sale offer to be approved, there are many departments and entities that must approve the offer or hold off on exercising their collection rights.  There are at least two internal levels of approval within the existing lender, then they may have to obtain approval of the actual note owner (which may be a different company), they may have to get HOA approval so that they don’t place a new lien on the property, they may have to obtain approval from a second mortgage company as well.

3) Two questions to ask - There are really only two questions to bother asking of the seller’s realtor during this process:

• “Did you receive my offer?”  Make sure the realtor and seller have received your offer.  They most likely won’t bother accepting it right away because it is subject to lender approval, but they may let you know if they believe it is strong enough to submit for lender approval.
• “Do we have lender approval?” - In reality, this is a question you probably won’t need to ask.  You will surely be notified if and when your short sale offer is approved.

• Flexibility - Because the process takes a while and the timeframe can be unpredictable, the more flexible the buyer, the better chance of success:
  

1) Don’t need to move/buy right away - if you are on a tight timeframe, like having a lease expiring or just moved and living in a hotel, then the unpredictability of short sale timeframes certainly won’t be for you.  If you can afford to wait one to six months to complete the transaction, then you may find yourself a deal.

2) Have many dream homes - submit one offer or many offers. You surely won’t get one accepted without putting one in.  There is nothing preventing you from submitting more than one offer.

• Ask questions about the property being offered for sale -  Here are some questions to help you along:

1) Has the seller’s realtor done many short sales previously? Obviously, the more experience, the more familiar with the process they will be.  Wowever, it isn’t rocket science and if they don’t have much experience, but know what to expect and have a plan, then that could be fine as well.  Ultimately, if the answer satisfies you, then go for it.

2) Has the realtor gathered a complete short sale package from the seller yet? This is important.  A short sale package will need to be submitted to the lender with your offer.  If the seller hasn’t filled out his/her part, they may not have the motivation to do so, and the whole process could be stalled.

3) Who is contacting the lender & are they experienced? Again, there could be several answers that are satisfactory here, but the important thing is to know that there is a plan and someone with experience and a plan who will be moving the process along. Is it:

• The Realtor and/or their team?
• A Third Party?
• Escrow?

Phew, that was a long post, sorry if there was too much detail, but I hope I have provided you enough insight into the process to determine if it is right for you.

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We’ve all heard the sad news that foreclosures are increasing here in the Aloha State. Of course that also correlates to a lot of short sales as well. The reality is that this does present a buying opportunity for people who dreamt of owning a home over the past few years but couldn’t afford it. Not only are values lower than they have been in years, but the large number of foreclosures and short sales have banks ready to sell the properties at less than market value. Is this too good to be true? Let’s take a closer look.

What a Short Sale is…

First of all, what is a Short Sale? Is it different than a foreclosure? Or different than a ‘bank sale’, bank owned property or ‘REO’? They are all related, but there are critical differences between each. A short sale is an event where the owner of a property wants to sell his/her house, but owes more on the house than it is currently worth. So, in order to sell the property, the owner must obtain permission from the bank that services the loan on the property (because the sale amount isn’t enough to pay off the loan).

What it is Not…

While a short sale is typically done using Realtors, a buyer and a seller; a foreclosure sale is done through the court system. A foreclosure happens because someone hasn’t made the minimum payments on the loan and the court is selling the property to pay off the existing lender. Sometimes the lender itself will buy the property and then sell it later, hopefully for more than the other bids at the foreclosure sale. Foreclosures are a topic for another post because purchasing one is far different than a normal transaction.

A ‘bank sale’, ‘REO’, or bank owned property is typically sold in the same manner as any other home, with the only difference being that the bank owns the property rather than an individual. In this case, the bank is in control of the property, the previous loan issues have already been resolved, so there isn’t the same process to go through as a short sale. These transactions typically happen more quickly and there are fewer unknowns, although, the condition of the home may be an issue since it may have already gone through the foreclosure process.

Stay tuned for our next post which addresses short sales and the short sale purchase process in much more detail…

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